Sunday pre-game 11/27

*Update: Please be sure to see victor_the_cleaner's arguments in the comments as to why he thinks the euro zone is unlikely to fall apart. Discussion welcomed.

Happy Thanksgiving, everybody. While my family was stuffing themselves with turkey, I was busy poring over these charts, and this is what I came up with.

I'm bullish on the metals this week, which I guess puts me in a minority of one. In fact, if silver doesn't jump overnight, I will buy some out of the money call options on SLV tomorrow. Yes, I agree, this chart looks bad (and recall the falling wedge I also drew on this same chart last week which suggested a fall to $26):


But, look at this YTD chart with daily closing points only:


Then, one of my long term charts also indicates we're at strong support:


The $SILVER:$USD chart is also about at major support:

While the $US10Y:$SILVER chart (a proxy for the worth of a coupon payment in silver) looks like it will make one quick move to the top of the purple channel before a rally, or else, follow the new dotted channel down this week.


On the weekly gold chart (first chart below), I suppose a fall to $1630 may be in the cards, although it might be the case that (on a closing basis) the lower black trend line has shifted up $50, which would be similar to how the 144 day MA on the daily chart appears to have shifted up by that amount (see how the purple dotted line on second chart below has been strong support since January):



Monthly gold looks to me like we're at strong support to close out November, ready for a breakout to the purple line in the months ahead:

And the $GOLD:$USD chart looks about ready for a rally, which one would think would come more from gold strength than dollar weakness:

I think how you play the metals here (or whether you play them at all) really comes down to your risk appetite. A catastrophe (e.g. out of Europe) seems at least an order of magnitude more likely than even in the recent past, in which case, in the short term, the metals might plummet. But I think the probability on an absolute level is much smaller than is being screamed from the rooftops. And barring a cataclysm, I don't think the metals can be pushed down much further. Let's see if I'm right.

7 comments:

AG said...

Great charts! I hope you are right. Support looks really strong on the trend line, but the Euro crisis might play some tricks on us.

AG said...

Rumor mill really kicked in this weekend and we had a nice bounce.

GM Jenkins said...

There are two schools on the euro crisis. One is that collapse is imminent and inevitabl;e. That's what, e.g., mish shedlock says. Also, Nouriel Roubini here:

http://rt.com/usa/news/roubini-eurozone-collapse-world-587/

Interestingly, a guy Roubini's been warring over on twitter over gold, Jim Rickards (Roubini thinks gold is a good investment only for retarded people, Rickards thinks it will be $7500 or even $44,000 as we return to a gold standard soon either by chaos or design) Rickards thinks the euro will be fine, and that the threat of disaster is just posturing and brinksmanship, similar to how the NBA lockout ended a week after it appeared there'd be years of litigation and the season was definitely over. He has more real world experience (e.g. iran hostage crisis) and he pretty much calls people who believe the doomsday for the euro scenario amateurs. Hard to say who's right. I did read Rickards book Currency Wars, and while it was pretty good, but overrated, both in its quality of writing, and in its strength of arguyment. Maybe i'll review it here.

victorthecleaner said...

Some people say the euro will collapse. I don't get this. Sure, there will be some restructuring of debt, some further haircuts, and a number of banks to be nationalized, perhaps the majority of them. But why would the euro collapse (in value)? Quite the opposite: so far, the Fed has printed way more money than the ECB has, and this means the euro will be stronger rather than weaker.

Secondly, these people say a breakup of the euro is imminent. Tell me first, isn't it better for Greece to go through a default inside the euro rather than devalue and then get crushed by the market? Finally, even if they wanted to leave the euro, how would they actually do this? They need to change the software of the banking system, print new notes or at least mark existing euro notes, get it legally fool proof, and all this in secret. As soon as there are insiders who know this in advance, these people will run on the banks. And once they have left, they would go bankrupt in any case (because either they switch the bonds to New Drachmas and the market will dump these bonds immediately, or they do not switch and then they will not be able to service their euro debt). Conclusion: A weak country leaving the euro under stress is basically impossible. They are trapped.

Finally, can a strong country leave, for example Germany? Yes, that's a lot easier. They just need a strict rule on which accounts to convert and make sure foreigners cannot run into Germany during the transition - that should be possible. They would have time to get this organized. But then, just after they have reintroduced the New Deutschmark, Germany would be in the same situation as Switzerland. Perhaps they would be immediately forced to peg the New Deutschmark to the euro. Then why bother to leave in the first place?

I think the main danger to the euro is that the ECB is somehow forced to cover the running budget deficits by monetizing government bonds. If they can somehow avoid this and play the ball back to the politicians, they can more or less do what they want. The second danger is that they cannot keep the banking system going, i.e. keep the banks lending to companies. Lending to consumers and to governments does not matter that much, but they need to protect the lending to companies. Bank lending seems to be still intact:

http://www.ecb.int/press/pdf/md/md1110.pdf

Victor

GM Jenkins said...

Great points, victor.

mrttt63 said...

Ok - interesting debate. I don't know if you have seen the "Preparing for Euro Breakup" debate on youtube, which was organized by Farage. The point is to have a plan B and there is no discussion around it.

Perhaps there are a few points...if the Germans are tired of being the camel of Europe. I happen to think that it is in Germany's best interest to leave and join other surplus countries rather sooner than later. Once Germany is infected then its too late.

So..
1) The "strengthening of the Deutschmark is relative to whom. Who in the future will be Germany's main trading partners. If we compare it to the weak Europeans, US and UK yes that will have a negative impact. If however you put China, Russia and the Northern Europeans one will find the real equilibrium.

2) Germany is also a big importer of Raw Materials and Energy especially. So costs will go down. And in the debate this was highlighted. There was already a period before and this forced the Germans to be hyper productive.

3) Switzerland on the otherhand is merely a parking space for weak currencies. There main industry is financial, banking etc.

4) I see it more a matter of surplus countries organizing themselves together to prevent them being dragged to their funeral.

5) So at the end of the day the debate perhaps is rather that the constituents of the present Euro aren't the ideal and a better "Euro" could be arranged by Germany leaving.

http://www.youtube.com/watch?v=426xE48MSlM

victorthecleaner said...

mrttt63,

again, why would Germany leave the euro if it is enough to simply stop paying subsidies to the south in order to protect their own position. They can achieve this inside the euro. No European union law forces them to keep paying for the deficits of the others - in fact, the rescue funds are quite a recent development, and Germany has already made it clear that they are not going to commit any more money. So they will eventually stop paying, I think, that's for sure. No need to leave the euro.

On the oder hand, there are a number of banks in Germany who purchased lots of Greek government bond. Sure, there will be some serious writeoffs. The only thing the ECB has to make sure is that banking services to non-financial companies continue without disruption.

Finally, the euro zone was constructed in such a way that its trade account and its current account are almost balanced. That gives them the maximum room for manoeuvre. They can devalue if they so decide, but they don't have to. Any single country who has left the euro, would have either a trade surplus or a deficit, and would be under pressure either if the euro goes up or if it goes down. Not so the euro zone as a whole. They have all options left open. This is a very very very very good reason for staying together.

Because ... one day ... the dollar ....

Victor